Someone may need to remind Jim Bullard what a “Jim Bullard” does.
In remarks to CNBC Friday morning, Bullard delivered what might fairly be described as a hawkish take on the likely evolution of Fed policy, to the chagrin of risk assets.
“I put us starting in late 2022,” he said, of liftoff (clip below). “My forecast said 3% core PCE in 2021 and 2.5% in 2022.”
“If that’s what you think is going to happen, by the time you get to the end of 2022, you’d already have two years of 2.5% to 3% inflation, so to me that would meet our new framework,” Bullard elaborated. “From there we could bring inflation down over the subsequent horizon.”
Of course, he added myriad caveats about forecast dispersion or, more colloquially, uncertainty, but he called the Fed’s hawkish tilt at the June FOMC “natural.”
“We were expecting a good year, a good reopening, but this is bigger than we were expecting, more inflation than we were expecting, and I think it’s natural that we’ve tilted a little bit more hawkish,” Bullard mused. “The committee has been surprised to the upside over the last six months. If you look at the December 2020 SEPs, we were projecting 4% real GDP growth in 2021. Now we’re saying 7%.”
While rational, that’s not what spoiled markets want to hear. I think the risk now may be that the Fed, having pounded the table so hard on the idea they’d not only countenance an inflation overshoot, but in fact work to engineer one, is increasingly seen as terrified.
That, in the face of just two upside surprises which everyone (doves, hawks and the staunchest Fed critics alike) agreed were almost impossible to parse, unless by “parse” you just mean stating that supply chain issues are pervasive.
The figure (above) wasn’t supposed to scare the Fed out of its newfound socially-conscious agenda. But I think it has. Note that if things had gone as planned, the blue bars and red line in the chart would be dismissed by reference to tame MoM readings. Unfortunately, the MoM prints haven’t been very “tame.”
Although Jerome Powell was keen to emphasize in the press conference that the Fed focuses on longer-term inflation expectations to gauge whether public perception is becoming unmoored, you’d be forgiven for suggesting there’s unspoken anxiety within the Committee about gauges like the University of Michigan and the New York Fed surveys (figure below), which show the consumer is at least a little bit alarmed, certainly on a 12-month horizon, but also out to three and five years.
On the taper debate, Bullard told CNBC that Powell “officially opened the discussion at this past meeting.”
This looks like the beginning of a full-on retreat from a group of technocrats who, as far as anyone knew on Tuesday, were still committed to being patient (even recklessly patient) in the face of surging prices in the interest of not “abandoning” the lower- and middle-income cohorts Powell promised to protect via the tweaked mandate. Those tweaks, you’re reminded, amounted to a belated apology for years spent exacerbating the wealth divide in America.
In any case, if Bullard is feeling hawkish, one shudders to think what kind of tone the “real” hawks will adopt when they saunter out over the coming weeks to deliver their take on where things are. And where things are likely going.